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Netflix Gambles on Big Data to Become the HBO of Streaming

Photo: Ariel Zambelich/Wired

Reed Hastings has a dream. Actually, it’s more of an obsession. The Netflix CEO wants his streaming video service to become the next HBO, but without the hassle of a cable subscription. It’s a bold plan, and if Netflix can pull it off, it’ll change the way you watch TV.

Netflix is gunning for the HBO original-content legacy. Its first exclusive series, Lillyhammer, debuted in January 2012. Critically acclaimed sitcom Arrested Development is being resurrected for an exclusive run on Netflix. Plus the first episode of the Kevin Spacey vehicle House of Cards will be directed by David Fincher.

All of this is big news for a company that started off by shipping DVDs to customers too lazy to return rentals to brick-and-mortar stores before incurring late fees. Netflix doesn’t just want to compete head-to-head with the established television networks with exclusive content. It wants to do it by using something that traditional networks don’t have: Access to your viewing habits and preferences. It knows who watches what and it’s making huge bets that their algorithm will help it determine which shows will be hits.

Plus, by delivering an entire season at once, the company would be putting all the power in the hands of viewers and could destroy “Event TV.”

But, securing original and exclusive content is a far cry from stuffing envelopes or making sure its network can handle weekend streaming traffic. Still, Netflix believes that it needs original content to keep ahead of streaming video challenges from Amazon, Vudu and even HBO GO. It wants to be the first real network of the Internet.

“If we do our job right, there’s always a reason to be a Netflix member on the original side in addition to the license side,” Hastings told reporters during the third-quarter earnings call.

To get people excited about its original content, Netflix needs a hit, and its process of mining for gold is different from traditional networks. Shows like the Walking Dead are hits out of the gate, while others, like X-Files, gained viewers as the show matured. Netflix, like all networks, wants a string of hits. But instead of generating a ton of content and hoping something resonates with viewers, it is using its vast data set of 29 million subscribers’ viewer habits and preferences.

While networks traditionally order a show based on whether it likes a pilot, Netflix ordered two full seasons (26 episodes) of House of Cards without seeing a single scene. It reportedly bid more than $100 million to secure first rights to the show, outbidding HBO and AMC because it is utterly convinced the show will be a big hit.

Why? Because it is counting on data mining and algorithms to provide an edge. The company knows how many people are watching Kevin Spacey and David Fincher movies and it knows how many viewers watch political thrillers. If that audience is large enough, getting exclusive access to House of Cards makes sense.

“We know what people watch on Netflix and we’re able with a high degree of confidence to understand how big a likely audience is for a given show based on people’s viewing habits,” company communications boss Jonathan Friedland said. “We want to continue to have something for everybody. But as time goes on, we get better at selecting what that something for everybody is that gets high engagement.”

All that talk of data mining and algorithm sounds impressive, and it may well turn Hollywood on its head. But Stephen Hootstein, co-executive producer of USA Network’s Covert Affairs, isn’t quite sure. Without knowing the formula Netflix uses to parse viewer data, he said, it’s difficult to discern if the company will be following trends or spotting innovative shows. Plus, betting on House of Cards or Arrested Development isn’t exactly a no-brainer.

“Essentially they’re betting on a known property, a BBC series that existed before this one and they’re betting on talented people which is a recipe for success.” Hootstein told Wired.

Not exactly something new. Hootstein does admit there is a way that Netflix’s data mining would impress him. “If they got Joe Blow off the street to do it and it was still successful, then essentially I would say, they found the idea that was so foolproof that anyone could have done it. You’re better off backing talented people,” Hootstein said.

Of course, even a TV show with an astounding cast and big-name writer or director can fail. No amount of algorithm could fix the ratings of Aaron Sorkin’s Studio 60 on the Sunset Strip. TV is a tough world, and in the end, viewers alone determine whether something succeeds or fails.

Gartner media analyst Michael McGuire says there are other challenges that could crush Hastings’ dream. It’s one thing to launch a network, but quite another to make it something people want to watch. See also: The CW.

“Getting into the original content and sustaining are two things.” McGuire says. He wonders what will happen if a show like Arrested Development isn’t as popular as the video-streaming service thought. Netflix is putting a lot on the line because it is ordering an entire season or two at once. It cannot cancel a show that flops, as is customary with the networks.

All of that aside, Netflix’s rise in many ways mirrors HBO’s. When HBO premiered in 1972, it was focused on delivering movies into the homes of cable subscribers. It began airing original content in the 1980s, with shows like Dream On, Fraggle Rock and Not Necessarily the News (remember Sniglets?). By the 2000s, HBO was famous for spectacular original content. The Sopranos, The Wire, Deadwood, Oz and Sex and the City made HBO the must-have channel of the TV renaissance.

Now, if you subscribe to HBO it’s not because you can watch movies — which you can watch on Netflix, Amazon or any other streaming service — but because you want original content like Boardwalk Empire, Game of Thrones and the hilarious Girls.

But Netflix’s pursuit of original and exclusive content is a bit different from HBO. Netflix doesn’t own the shows that will premiere on the service. Instead the company is licensing the the content for a set amount of time. House of Cards will be exclusively on Netflix for two seasons. After that, it could be picked up by anyone willing to outbid Netflix.

HBO on the other hand, owns its original programming. The network can do whatever it wants with Game of Thrones — release it on Blu-ray, syndicate it to another network or keep rebroadcasting it until George R. R. Martin finishes the seventh book (forever). It has the money and history to do that. Time Warner’s recent third quarter earnings puts HBO and Turner Broadcasting operating income at $1.2 billion, while Netflix’s recent third quarter net income was $8 million.

At this moment, it makes financial sense for Netflix to license content instead of own it. But even that can be a huge financial risk. Still, Netflix wants to change the way you watch it.

The entire first season of House of Cards will appear on Netflix on February 1, available for streaming. No more waiting an entire week to see what happens next.

“It’s going to change the way people look at television,” Friedland said. “By putting all 13 episodes out on the same day giving everyone the opportunity to watch it at their own pace is going to be a major moment. We put the consumers in charge of their own experience. It’s going to be an interesting time.”